Semis: 9 turns of de-rating, c.20 points of EPS accretion

A c.9x de-rating while the numbers went the other way. SOXX (ICE Semiconductor Index) now trades on 19.6x NTM P/E, versus c.26x at the start of July (and c.29x at the June peak). During the same window, NTM EPS estimates for the index accelerated by c.20%, driven by strong Q2 26 earnings momentum.

July’s correction has been followed by a month dominated by macro headlines. August was a tale of two halves; SOXX rallied c.11% in the first half of the month (c.20% since 29th July), while some of those gains were given back in the second half of the month due to multiple macro headwinds all landing parallelly (some interconnected)…

• Inflation remains high: July headline CPI rose 3.4% y/y, while headline PCE rose 3.7% (vs Fed’s long-term target of 2%).
• Fed back in play: July's hold came with no forward guidance; futures now imply c.60% odds of a 25bp hike in September, further boosted after Kevin Warsh’s speech at Jackson Hole on 28th August, reiterating Fed’s commitment to reach the 2% inflation target.
• US-Iran conflict and the oil shock: Brent has gone from $87/bbl (on 3rd Aug) to c.$99; +13% in five weeks and +49% YoY, as disruption on Strait of Hormuz got worse.
• BOJ and the yen carry trade: Governor Kazuo Ueda had said a rate hike is possible at any meeting, and today's revision of Japan's Q2 GDP to 1.4% annualized (from 1.1%, on a milder capex decline) strengthens the case for a hike on the meeting scheduled on 18th September. Many economists now also expect a further hike in December.

Ionic View

We think current company fundamentals warrant a higher multiple. The derating in the 2nd half of August has been driven almost entirely by macro-overhangs. High inflation, a hawkish Fed, escalation of the US-Iran conflict, and the threat of a yen funding squeeze have all weighed on valuation while none of them materially change the demand for compute. As macro-overhangs abate, we expect these multiples to re-rate.